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The P&L of 3PLs
The critical factors affecting the profitability of 3PLs and the challenges of determining cost to serve by client.
The ‘P’ and ‘L’ in “3PL'' doesn't refer to Profit & Loss, but understanding the drivers of P&L is critical to the success of any Third Party Logistics operation. When serving numerous clients - each with different products, contractual obligations, and pricing structures - knowing where you are making money and where you are losing money can become a complicated endeavor.
As a multi-tenant 3PL warehouse operation, your client contracts can be modeled with a healthy margin, but when the smoke clears each month, more often than not, the margin realized is often far below initial projections. Why? In the simplest terms:
Some clients are making you money,
while others are costing you - a LOT.
When the actual cost to serve a client approaches (or exceeds) the associated revenue, you lose more than just money. You also lose space - space that could otherwise be utilized to serve a higher margin client. Put another way: low margin clients are a hit to both your profit and opportunity cost. It is therefore essential that your organization understands which clients are weighing down the P&L.
It should be easy enough to determine profitability by client…you just need revenue by client and Cost to Serve by client. But while revenue by client is readily available, an accurate Cost to Serve by client is an elusive metric for many, if not most 3PLs. Without this critical information, client service costs get blended together, and the ability to identify clients that are costing money, time, and space fades away along with projected margins.
Why is Cost to Serve by client so challenging?
Calculating Cost to Serve by client requires the accurate allocation of time and productivity for every client task performed throughout the day, whether by human or machine. That’s a significant challenge by itself - no one wants their teams wasting time clocking in and out every time they perform a task for a different client. But on top of this, many 3PLs have to operate in multiple warehouse management systems, timecard systems, etc., making it virtually impossible to maintain an accurate and consistent allocation of time and productivity by client.
Most WMS / ERP systems don’t have the level of detail required to report Cost to Serve by client. At Takt, we've built our platform specifically with Cost to Serve in mind. Takt automatically allocates your operators' time and productivity to the right client...no cross-clocking required. We can even allocate time and productivity from your AMRs or other automation - giving you clear visibility into the clients and products that are making you profitable, and those that may be dragging you down.
With a clear understanding of variable cost per unit/client, you can intelligently forecast profitability, have data driven negotiations, and unburden yourself from unprofitable clients.
And while we're at it, Takt can also help you significantly and specifically reduce your overall labor costs, and better engage your team members, creating a highly productive and motivated workforce.